Salary Sacrificing may suggest you give up your hard-earned pay, but there could be some benefits to gain.
It is a voluntary arrangement between you and your employer, where you 'sacrifice' a part of your income in exchange for desired non-cash benefits. In other words, you receive a combination of salary (reduced proportion) and benefits in a tax-effective manner.
Read this blog to find out what salary sacrificing is, how it works in Australia and the tax implications of an arrangement.
1. What Is Salary Sacrifice?
Salary sacrifice involves receiving less income from the employer in return for taxed benefits instead of taking a fully assessable salary.
So, the employee won't get cash but will still receive their money's worth in the form of non-cash benefits such as childcare vouchers, higher pension contributions, etc.
As the deduction lowers your taxable income, you will pay less tax and national insurance, increasing your take-home pay. The Salary Sacrifice arrangement also benefits employers as it helps them save on national insurance contributions.
2. Who Can Participate In Salary Sacrifice?
Salary Sacrifice is a voluntary agreement between the employer and the employee. Some employers automatically enrol their employees in their scheme. If you wish to opt out, you can inform your employer.
Talking about the participation criteria, any employee can take part in this agreement provided that his salary is more than the national minimum wage in Australia ($812.60 based on a week of 38 hours)
It is a necessary condition for Salary Sacrifice, as it is illegal for your income to fall below the National Minimum Wage. So, if you already earn low rates, this scheme is inappropriate.
3. What Is Salary Sacrifice Example?
Salary sacrificing can help lower your taxable income. So, "where does salary sacrifice go" the portion of your salary goes to your workplace pension or other benefits as employer contributions.
Let us understand through a salary sacrifice example:
If your pre-tax salary was $80,000 a year, you might receive $70,000 as income and salary sacrifice the rest of $10,000 into your super.
Thus, it reduces your taxable income to $70,000. According to ATO, you are liable to pay income tax on the reduced salary and not on the total wage, i.e., $80,000.
Your earnings - $100,000 per year; Your living expenses - $60,000 per year; SG amount your employer pays - 10.50% over and above your wage.
|Salary Sacrifice (B)||$0||$17,000|
|Assessable Income (A-B)||$100,000||$83,000|
|Income Tax Payable (C)||$24,967||$19,102|
|After-Tax Income (A-B-C)||$75,033||$63,898|
|Contributions Tax @ 15% (D)||$0||$2,550|
|Total Tax Payable (C + D)||$24,967||$21,652|
|Benefit Of Salary Sacrifice||$3,315|
Three Salary Sacrifice Scenarios
|Calculation||1. Salary Only
|2. Salary + Car
(Without Employee Contributions)
|3. Salary + Car
(With Employee Contributions)
|Less salary sacrifice||Nil||$17,353.00||$4,145.00|
|Less income tax (2021–22 rates)||$11,592.00||$5,952.28||$10,244.88|
|Less 2% of Medicare||$1,300.00||$952.94||$1,217.10|
|Income after tax and salary sacrifice amount||$52,108.00||$40,741.78||$49,393.12|
|Less employee contribution||nil||nil||$7,000.00|
|Less car expenses||$11,500.00||nil||Nil|
|Net disposable income||$40,608.00||$40,741.78||$42,393.12|
|Reportable fringe benefits amount for employee's income statement or payment summary||nil||$13,207.60
(car Fringe benefit taxable value of $7,000 × 1.8868)
4. How Does Salary Sacrifice Work?
You and your employer enter into a written/verbal salary-sacrificing arrangement when you join a new job or after working with the same employer for some time.
As per the agreement, a mutually-agreed amount gets deducted from your pre-tax salary to receive benefits in return for a prespecified period.
Also, you only can salary sacrifice a part of a 'future entitlement' and not any of your pay, leave entitlements, commissions, or bonuses that you have before entering the arrangement.
It implies that you must enter the salary-sacrificing contract before performing the work. Once the agreement forms, your employment contract will mention the agreement details along with your remuneration. Both parties can renegotiate a salary sacrifice arrangement at any time.
Another condition of the agreement is that employees can't access their sacrificed salary for the duration of the arrangement.
5. Benefits Of Salary Sacrifice
You save on Tax and national insurance.
You get affordable access to services that enhance your overall well-being, such as a bike, a gym membership, childcare, etc.
Your employer contributes more pension.
Those who work in public health and charitable organizations get attractive salary sacrifice rent benefits, credit card expenses, and mortgage payments.
You pay less for bicycles, cars, annual parking permits, and computer equipment when you receive them in exchange for a salary sacrifice. Thus, low cost and the facility to pay in instalments enable you to own newer and more expensive models that won't have been possible if you had bought them personally.
By paying more into your workplace pension, your pension pot grows faster and helps you build more savings for retirement.
The lower salary entitles you to claim increased tax credits.
By investing more money in superannuation, your earnings are taxed lower than your individual tax rate.
You can only access your sacrificed salary once you meet certain retirement conditions, which compels you to save more.
Salary sacrifice contributions can also help cover the premiums cost of life insurance within super.
6. Are There Any Negatives To Salary Sacrifice?
One of the main disadvantages of salary sacrifice is that it lowers your taxable salary. You receive less pay in your bank account every month.
A lower salary can reduce your borrowing capacity and chances of getting a big mortgage, life cover, statutory maternity or paternity pay, etc. It may reduce other earnings-related benefits your employer offers, such as income protection insurance or life cover, as the amount is calculated based on the multiples of your salary.
Furthermore, as salary sacrifice payments classify as employer contributions, you may not get a refund on your contributions when you leave a workplace pension scheme within two years.
Low-Income employees can participate in this scheme as reducing your salary may bring it below the national minimum national wage based on your age.
You can only access your salary sacrifice into super if you meet your superannuation preservation age to access it.
Salary sacrifice super contributions are subjected to capital fluctuations and market volatility. It doesn't make it a good option for risk-averse investors.
As salary sacrifice contributions are concessional contributions, they incur 15% of contributions tax. In this case, a high-income earner ($250,000 and above p.a.) incurs an additional 15% tax on your contributions. However, low-income earners (below $37,000 p.a.) may get a refund in contributions tax.
7. What Can You Salary Sacrifice?
Salary sacrifice varies not only between nations but also between companies. It is best to consult your HR department to understand what your employer offers.
Some of the expected benefits include the following:
Contributions to your superannuation
The cost of items such as bicycles, cars (via a novated lease), mobile phones, computer equipment, bus pass, and laptops
Pre-paid cards to use with certain retailers
Increased Employer Pension contribution
Car parking permit
Additional annual leave
Payment of expenditures for school fees, loan repayments, and childcare costs.
8. On What Benefits Is Fringe Benefits Tax Payable?
Employers pay fringe benefits tax on the value of the Fringe tax benefits (FBT) they provide you, such as cars, loan repayments, property, childcare costs, and school fees.
The fringe benefits tax is not payable on the below types of benefits:
Exempt Benefits: portable electronic devices, computer software, briefcases, protective clothing, and tools of the trade for work-related use
Superannuation: salary sacrificed super contributions that go to a conforming super fund.
9. How To Set Up A Salary-Sacrifice Arrangement?
Salary sacrifice is an optional arrangement between you and your employer. Your existing employment contract will alter to reflect the changes in working conditions and salary payment.
You can participate in this scheme by signing a newly drawn-up contract, an addendum, or an attached letter. The new employment arrangement mentions their new salary and the benefit they receive in exchange.
The amount of your pay you can sacrifice depends on your employer, the arrangements it offers, and the type of benefit you receive. Though there is no specified maximum amount, you can't lower your salary so that your earnings fall beneath the national minimum wage.
It is worth noting that you can modify or stop the salary-sacrifice arrangement at any time. It is usually allowed once a year on the employer's prior consent.
10. How Much Can You Salary Sacrifice?
There is no specific limit to how much you can sacrifice. The only condition is that your reduced salary must remain above the national minimum wage.
Generally, the amount of your salary you can sacrifice is determined based on your existing contractual arrangement with your employer.
Take good care when considering the amount, as it could impact your future finances in varied ways. The salary Sacrifice Calculator is a valuable tool to determine the maximum amount you can sacrifice based on your salary sacrifice limits and wage.
When sacrificing salary for pension, consider your pre-retirement and retirement goals, as a lower salary can lower your mortgage options.
To salary sacrifice for super, the standard concessional contributions cap is $27,500 per person annually. To determine the amount you can salary sacrifice, add the total expected employer SG contributions payable into your account for the year and subtract the amount from the $27,500 cap.
You can sacrifice the remaining amount for your super.
Follow the below rules when deciding how much salary to sacrifice.
As you can't access salary contributions to super once you make them, sacrifice only that much salary that remains after covering your living expenses and any short-term capital expenses.
Ensure your salary sacrifice is, at most, the concessional contribution cap of $27,500 per financial year.
Only salary sacrifice if the benefit you expect is helpful for you.
11. Do You Lose Pension On Salary Sacrifice?
No. When you choose to salary sacrifice, your employer reduces your monthly salary payment and increases his monthly contribution to your workplace pension in the same ratio.
Thus, employer contributions to your workplace pension increase when you sacrifice salary.
12. Do You Get Credit Checked For Salary Sacrifice?
No. Your employer doesn't check your credit rating to decide whether or not to allow you to sacrifice a part of your salary in exchange for a benefit.
Salary sacrificing is not like applying for a debt or credit that requires a credit check. However, if you carry an existing debt, you should avoid salary sacrificing and focus on repaying the debt.
13. What Is The Maximum Salary Sacrifice?
There is no upper limit on how much salary you can sacrifice; however, your lower salary must not fall below the national minimum wage.
14. Is Salary Sacrifice Worth It?
Salary sacrificing can be beneficial for the most obvious reason of the tax benefits it provides. Besides reducing your tax liability, it also helps boost your pension pot, making it easier to afford items that would otherwise have been impossible without it.
However, before considering salary sacrifice, be aware of its benefits and disadvantages and how it impacts your finances. Read the fine print of the agreement, and you have this opportunity to buy only the things you need.
15. How Does Salary Sacrifice Affect My Tax Return?
In a salary sacrifice agreement, you receive less income before Tax and in exchange for certain benefits from your employer of similar value. As your taxable income reduces, you pay less Tax on your income.
So, under this arrangement, you pay less Tax than you would have without a contract.
16. Is Salary Sacrificing A Good Idea?
Look at these considerations to decide whether going for this arrangement is the right choice for you:
Salary sacrificing is more tax-effective for people in the middle to high-income slab. According to Moneysmart, salary-sacrificing super can be advantageous if you earn above $37,000 per year. Those who earn $37,000 or less may receive the low-income superannuation tax offset of up to $500 a year.
If salary sacrificed super contributions exceed the concessional contributions cap of $27,500 per financial year, which could attract additional Tax.
Once the money goes into your super, it remains until you retire. Access to superannuation is limited before your preservation age.
Your employer or the 3rd party that facilitates the salary sacrifice arrangement may charge you an administration fee and charges applicable to benefits like a novated lease. You usually have to pay for the cost out of your pre-tax dollars.
Finally, the usefulness of salary sacrificing depends on your financial situation. It is a good idea to take an opinion of a financial advisor and a tax consultant before requesting or agreeing to this arrangement.
17. Is It Better To Salary Sacrifice Or Buy A Car?
Salary sacrificing a car implies that if you wanted to buy a car, you could pay some portion of your monthly salary to pay for the vehicle. Let us look at the pros and cons of this scheme to decide whether it is worth it.
If you don't have adequate funds to buy a car outright, salary sacrificing can help you get a car in monthly instalments (salary sacrifice) than paying for it in a lump sum.
You can easily budget a salary sacrifice car, as you know how much you have to pay for it per month, and can plan your monthly expenses accordingly.
You may take advantage of tax benefits by using this arrangement to purchase a car.
You can use this method to buy Electric cars at a far lower price. Due to being environmentally friendly vehicles, you can get discounts on greener vehicles. After you own an electric car via the salary sacrifice scheme, you may also get other benefits, such as free-of-cost charging points at work and free charging stations in specific areas.
If the car's value drops faster than your monthly payments, you may pay more than its actual worth.
You might pay considerable interest on your loan if buying a car through a monthly salary sacrifice amount. It may make it tough to manage your savings.
Failing to afford your sacrifice payment and monthly expenses could impact your credit rating.
If you break the agreement, you may have to pay penalties that can cost you even more.
Considering that you can pay monthly expenses and sacrifice some salary per month without hassle, salary sacrifice can help save money when buying a brand-new car.
Also, knowing the fixed deal amount in advance lets you easily budget the purchase. Thus, salary sacrificing a car can be a great option over purchasing it outright or on a high-interest bank loan.
Salary sacrificing can be a beneficial tool to realise your financial goals; however, make sure you don't buy unnecessary things to gain tax benefits.
Always weigh its pros and cons, and understand its impact on bonuses, pay raises, or other work-related benefits before entering the salary sacrifice arrangement.
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